Small business legal structures in Australia

There are several different legal structures available in Australia for small businesses.  If you are planning on starting a new business in Australia, you should carefully consider the type of business structure that is most suitable for your new venture.

Overview of business structures in Australia

 

Sole trader

This is the simplest and most common form of business structure in Australia. The business is owned and operated by a single individual.  A sole trader is personally responsible for all aspects of the business, including any debts or liabilities. As a sole trader, you’ll need to apply for an ABN (Australian Business Number) and file an individual tax return that includes your business income and expenses.

Advantages of sole trader structure

  • Quick set up – It is easy to set up and run a sole trader business.
  • Control – Sole traders have complete control over all aspects of its operation, including decision-making, finances, and management.
  • Flexibility –  Solo entrepreneurs can work from home or anywhere else. A limited budget can be advantageous for those starting out.
  • Tax advantages – Sole traders can claim tax deductions for business expenses. Your personal tax allowance can also be used to reduce your tax liability.
  • Profit retention – Sole traders don’t need to share profits with other shareholders or partners since profits belong to them.
  • Personal satisfaction – As a sole trader, you have complete control over the success of your business.

Partnership

A partnership is a business structure where two or more individuals share ownership of the business. Partnerships are similar to sole traders in that the partners are personally responsible for the business’s debts and liabilities. 

Partnerships can be general or limited.  In a general partnership, all partners have equal say in the business’s operations.  In a limited partnership, one or more partners have limited liability.

Advantages of a partnership structure

  • Shared responsibility – Businesses run more efficiently when partners share responsibilities and workload. A partnership can be strengthened by bringing partners with different skills and expertise.
  • Access to resources – Partnering can benefit from the combined financial, skill, and knowledge resources of the partners involved.
  • Tax advantages – The profits of a partnership are taxed differently than those of sole traders or companies. If partners are in higher tax brackets individually, this can provide tax benefits.
  • Limited liability – The liability of each partner in a partnership is limited to their investment. Individual partners can be protected from business risks.
  • Flexibility – Partnerships are flexible business structures that adapt to changing conditions. It is easy to add or remove partners from a partnership.
  • More credibility – Businesses can gain credibility and stability through partnerships. Multiple owners ensure that the business doesn’t rely on a single individual.

Company

A company is a separate legal entity from its owners.  This means that the company itself is responsible for its debts and liabilities. This structure is more complex than sole traders or partnerships.  You’d need to require a company with the Australian Securities and Investments Commission (ASIC). Companies are often used for businesses with multiple owners.

Advantages of a company structure

  • Limited liability – Companies have limited liability for debts and obligations. This means the owners’ personal assets are protected should the company go bankrupt.
  • Perpetual existence – Despite changes in ownership or shareholders, companies have a perpetual existence. This provides greater stability as a business can continue to operate even with changes in ownership. 
  • Access to capital – Businesses have greater access to capital than sole traders or partnerships. Shares can be issued to raise capital.
  • Improved credibility – Companies may build a positive reputation over time as they have perpetual existence. Better credibility helps companies attract customers, suppliers, and investors.
  • Tax benefits – Business structures allow companies to claim more tax deductions and benefits. Additionally, companies are taxed at a flat rate, which is lower than individual tax rates.
  • Transferability of ownership – Buying and selling shares of a company allows for greater ownership flexibility.

Trust

A trust is a legal arrangement where a trustee holds and manages assets on behalf of beneficiaries. Trusts can be used for various purposes, such as asset protection, tax minimization, or estate planning. Trusts can be complex and require professional advice.

Advantages of a trust structure

  • Tax benefits – Trust structures offer many tax benefits which are often used for tax planning. Tax liability is reduced because trusts can distribute income to beneficiaries with lower tax rates.
  • Asset protection – A beneficiary’s assets in the trust may be protected from bankruptcy or legal action.
  • Flexibility – Flexible trusts can be tailored to meet the beneficiaries’ specific needs. Various types of assets can be held in them, or different distribution arrangements can be made.
  • Estate planning – Trusts enable individuals to transfer assets tax-efficiently to beneficiaries in estate planning.
  • Privacy – People who prefer to keep financial affairs private can benefit from trusts because they don’t need to be publicly registered.
  • Continuity – Trusts can provide continuity in asset management even after the beneficiary or trustee has died. Assets can be managed and distributed according to the beneficiary’s wishes for generations to come.

Choosing the right legal structure for your small business depends on several factors.  You should consider your personal circumstances, the nature of your business, and your long-term goals. It’s important to seek professional advice from a lawyer or accountant before making any decisions.

Business compliance for sole traders

Sole traders must comply with reporting obligations around employees, having an ABN, potentially paying GST and doing payroll for sole traders.  Read more business tips for sole traders and other small businesses from the Payroller team.

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